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Don't Buy eBay Inc. (NASDAQ:EBAY) For Its Next Dividend Without Doing These Checks

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see eBay Inc. (NASDAQ:EBAY) is about to trade ex-dividend in the next 4 days. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled to receive a dividend. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. In other words, investors can purchase eBay's shares before the 30th of November in order to be eligible for the dividend, which will be paid on the 16th of December.

The company's next dividend payment will be US$0.22 per share, and in the last 12 months, the company paid a total of US$0.88 per share. Based on the last year's worth of payments, eBay stock has a trailing yield of around 1.9% on the current share price of $45.23. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to investigate whether eBay can afford its dividend, and if the dividend could grow.

View our latest analysis for eBay

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. eBay paid a dividend last year despite being unprofitable. This might be a one-off event, but it's not a sustainable state of affairs in the long run. Considering the lack of profitability, we also need to check if the company generated enough cash flow to cover the dividend payment. If eBay didn't generate enough cash to pay the dividend, then it must have either paid from cash in the bank or by borrowing money, neither of which is sustainable in the long term. It distributed 33% of its free cash flow as dividends, a comfortable payout level for most companies.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

historic-dividend
historic-dividend

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. eBay was unprofitable last year and, unfortunately, the general trend suggests its earnings have been in decline over the last five years, making us wonder if the dividend is sustainable at all.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. eBay has delivered 12% dividend growth per year on average over the past four years.

Get our latest analysis on eBay's balance sheet health here.

Final Takeaway

Should investors buy eBay for the upcoming dividend? It's hard to get used to eBay paying a dividend despite reporting a loss over the past year. At least the dividend was covered by free cash flow, however. It's not that we think eBay is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

Although, if you're still interested in eBay and want to know more, you'll find it very useful to know what risks this stock faces. For example - eBay has 3 warning signs we think you should be aware of.

Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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